WHAT IS A BUY-SELL AGREEMENT?

What Is a Buy-Sell Agreement?

Posted By
Davidov Law Group

When you are involved in a business partnership and you are planning your
estate, you have to consider the matter of succession. Your share in the
business may well be one of your most significant assets. But when you
pass on, how is your share carved out and passed along to your heirs without
negatively impacting your partners and the viability of the business?
This may sound rather challenging, there is a rather simple and elegant
solution available in the form of the buy-sell agreement.

These agreements can be used to facilitate succession due to retirement,
disability, or a voluntary exit for any reason, but they can also be used
in estate planning. If you are the co-owner of a small business, when
you pass away you will invariably bequeath your share to your heirs. What
can they logically do with it? One or more of your family members could
possibly assume your ownership role, or they could sell your share to
the higher bidder.

These possibilities are usually not going to resonate well with the surviving
partners, and depending on the circumstances, your family would probably
prefer not to have to try to find a buyer or attempt to fill your shoes
as a co-owner. The way that a buy-sell agreement can satisfy both parties
is through the purchase of life insurance. Each partner in the business
takes out a policy on the life of every other. Should you pass away, the
policy proceeds are used to buy your share from your heirs. This is called
a cross-purchase plan, and the other most common buy-sell mechanism is
the entity plan. To implement this approach, the business entity itself
purchases life insurance on each of the co-owners, and when one of them
passes away the proceeds are used to buy the deceased partner’s
share from his or her family.

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